ENGLE v. SHAPERT CONSTR. CO.

UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

February 9, 1978

SAMUEL A. ENGLE and DOROTHY I. ENGLE, Plaintiffs
v.
SHAPERT CONSTRUCTION COMPANY, a Pennsylvania Corporation, and PAUL E. SHAPERT, Individually and as President of Shapert Construction Company, Inc., and THEIR AGENTS, SALESMEN, EMPLOYEES ACTING IN CONCERT WITH THEM OR AT THEIR DIRECTION OR UNDER THEIR CONTROL, Defendants

Herman

The opinion of the court was delivered by: HERMAN

This case arises from a contract for the installation of steel siding on the house of Plaintiffs, Samuel and Dorothy Engle. As more fully set forth below, disputes arose as to the terms of the contract and the quality of the work performed, with the result being that Plaintiffs refused to consummate a loan from the Western Pennsylvania National Bank which had been arranged to finance the job. Defendant Shapert, unable to secure payment from the bank under the proposed loan, confessed judgment against Plaintiffs pursuant to a cognovit note which Plaintiffs had signed in conjunction with the contract documents. After a writ of execution was issued, Plaintiffs filed this suit, alleging violations of the Consumer Credit Protection Act and violation of their constitutional right to due process of law, and the late Chief Judge Sheridan issued a temporary restraining order restraining a sheriff's sale of Plaintiffs' home. Defendants then counterclaimed for the contract price.

After several continuances, the case was tried before Judge Sheridan without a jury on July 6 and 7, 1976. Judge Sheridan died shortly thereafter without having rendered a decision. This decision is based on review of the trial transcript and exhibits, and arguments of counsel heard on May 19, 1977.

b. a "special price" would include installing two doors and four windows, for a total price, with siding on the entire home, of $3,000.00;

c. free gifts, $25.00 referral fees and job offers would be made;

d. the first payment would not be due for six months, and flexible payment terms would be available if the Engles' income were interrupted;

e. disability and life insurance was available for Mr. Engle.

9. The Engles finally signed a contract, dated October 9, 1973 for "siding on entire home", foil insulation, white trim, two doors and four windows, checking all lumber on home and with "all work to be of first class quality", at a price of $3,690.00.

10. The contract documents and loan application were prepared by the salesman, Patsy Arabia, and presented to the Engles for signature without fully explaining their contents. One copy of a form containing Truth in Lending disclosures was given to the Engles at that time.

11. On October 12, 1973 Paul Shapert called the Engles and informed them that he would be out very soon to begin installation.

12. On October 16, 1973 Paul Shapert and two employees arrived at the Engle home to begin installation of the siding.

13. After work had begun Paul Shapert told Mrs. Engle that the windows and doors called for in the original contract could not be installed due to a strike at the manufacturer's factory. He further informed her that the fourth wall of the Engle house, which faces the neighboring house, could not be covered with siding at the agreed upon price.

14. On or about October 19, 1973 Paul Shapert told Mrs. Engle that the original contract was "worthless" and induced the Engles to sign a second contract, also at a price of $3,690.00, but providing for siding on only three sides of the house, with no doors, windows or trim included. The contract was backdated to October 9, 1973. Among the papers signed by the Engles at this time was a note containing a warrant of attorney to confess judgment, the significance of which was not explained. No further disclosures pursuant to the Truth in Lending Act were made.

In this consumer transaction we discern four violations of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., and "Regulation Z" promulgated thereunder by the Federal Reserve Board, 12 C.F.R., Part 226. Two of these violations arise from the use of the cognovit note discussed above.

The acceleration clause contained in the cognovit note constitutes a charge payable in the event of default and should have been mentioned along with other such charges on the disclosure statement (Plaintiff's Exhibit 3). The disclosure form contains under the heading "Delinquency Charges" the following information:

"If any installment to be paid hereunder shall be delinquent for more than ten (10) days there shall be due and payable hereunder to the holder of the note evidencing this indebtedness, in addition to the above debt, a delinquency charge of five (5) cents for each dollar due and payable for the purpose of defraying the expense of handling said delinquent payment. This charge shall not exceed five ($5.00) dollars in respect of any one such late payment. Such delinquency charges shall become at once due and payable after the ten (10) day period, or may be collected with the last installment."

The confession of judgment note also constitutes a security interest in the consumer's property which was not adequately disclosed on the form.
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The disclosure form contains the following statement under the heading "Security Interest":

"In accordance with the Federal Truth in Lending Act, until all payments have been made, the Contractor and any Subcontractor will be considered by virtue of the Mechanic's Lien Law to have a security interest in the Real Property to be Improved. The Contractor and any holder of the Note evidencing the indebtedness will be considered by virtue of any warrant of attorney to confess judgment contained in the said note to have a security interest in all real property owned by the Buyer, including but not limited to the Real Property to be Improved. Any holder, if a bank, shall have a security interest in all deposits and other personal property of the Buyer which come into the said bank's possession."

This statement contains little to alert the lay consumer to the fact that judgment may be entered and execution issue against his property without a hearing. We think that 12 C.F.R. § 226.8(b)(5), providing for "[a] description or identification of the type of any security interest held or to be retained or acquired by the creditor" requires at least this much.

If the confession of judgment clause itself had appeared on the same document as the other required disclosures, further explanation of its terms might not have been necessary. See Garza v. Chicago Health Clubs, Inc., supra, 347 F. Supp. at 359-60. But here, where the cognovit note is on a separate piece of paper with no identifying heading, signed several days later and not accompanied by an explanation of its significance, more than a vague reference in the disclosure statement to "any warrant of attorney to confess judgment" is required to warn the consumer of the possible consequences of default.

Another flaw in the above-quoted statement of security interests is its reference to the Mechanic's Lien Law. It appears that no security interest arising under the Mechanic's Lien Law was ever contemplated in connection with this transaction. If the loan from the bank had gone through as originally intended, Shapert would have been paid the full contract price upon completion of his work,
*fn4"
and would thus have had no basis for claiming a mechanic's lien.
*fn5"
The Court of Appeals for this circuit has recently held, in Gennuso v. Commercial Bank and Trust Co., 566 F.2d 437 (3d Cir. 1977), that reference to a security interest that does not in fact exist constitutes the inclusion of "additional information" in such a manner "as to mislead or confuse the customer" in violation of § 226.6(c) of Regulation Z.

Finally, we conclude that § 226.6(c) was also violated by the misrepresentations concerning the availability of life and disability insurance in connection with this transaction, which was clearly calculated to mislead.

Plaintiffs also seek a declaratory judgment that Defendant's acts in connection with this transaction violated several provisions of the Pennsylvania Home Improvement Finance Act, 73 P.S. § 500-101 et seq. This is a question entirely of state law which we decline to entertain. No rights in favor of a private litigant can arise from a violation of the Pennsylvania Act, the sole means of enforcement being through the state Attorney General or District Attorney. 73 P.S. §§ 500-501, 500-502. Since the Pennsylvania Act could not be the basis of any relief in addition to that available to Plaintiffs under federal law, discussed above, a lengthy analysis of the application of that Act to this transaction would serve no useful purpose.

F. Punitive Damages and Attorneys Fees

Plaintiffs seek the award of both punitive damages and attorney's fees,
*fn7"
neither of which will be granted.

Although Plaintiffs have certainly been the victims of some unjustifiable commercial behavior, we feel the most culpable party is the salesman, Patsy Arabia, who has never been made a party to this action and whose present whereabouts are unknown. It was Arabia who showed no scruples in the use of high pressure sales techniques to push the Engles into a contract which they could not afford and on which Shapert could make no profit. While Shapert also manipulated the Engles unconscionably in his efforts to salvage some profit from the contract, he has already paid considerably for his misconduct in that he has received no return for the material and labor he has expended. We think it would be unjust to impose punitive damages on Shapert in addition to what he has already paid.

The Engles were represented in this action by Central Susquehanna Valley Legal Services, and thus have incurred no attorney's fees. To award attorneys fees in this case would not serve to make Plaintiffs whole for the expenses incurred in enforcing the Act, but only to further penalize Shapert for the acts of his now departed agent.

III. CONCLUSIONS OF LAW

1. By refusing to perform the work called for in the original contract of October 9, 1973, and by performing such work as was done in an unsatisfactory manner, Defendant Shapert Construction Company materially breached its contractual obligations, relieving Plaintiffs of their duty to pay the contract price. Defendant has nonetheless enriched Plaintiffs by the value of the materials installed, approximately one thousand dollars, for which it should be compensated.

2. Defendants Shapert Construction Company and Paul Shapert have violated Section 128(a)(9) of the Consumer Credit Protection Act, 15 U.S.C. § 1638(a)(9), and sections 226.8(b)(4), (5) and 226.6(c) of Regulation Z promulgated thereunder, 12 C.F.R. § 226.8(b)(4), (5) and 226.6(c) and are thereby liable to Plaintiffs for a penalty of one thousand dollars. This penalty is offset by the value of the materials installed on Plaintiffs' home, and is thus satisfied.

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